Costco Project

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Costco Project
04.02.2020
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General Environment

The environmental analysis should be carried out continuously since its aim is to obtain information, on which assessment is made regarding the current position of the company. This analysis gives the organization time to enhance forecasting capabilities, to prepare the plan for unforeseen circumstances, to develop an early warning system for possible threats, and to develop strategies that can transform old threats into favorable opportunities. The analysis of the environment includes the study of the impact of the political processes, economy, demographics and sociocultural factors, technological development, environment, and legal factors.

Political Factors

Political factors significantly affect the different types of businesses, in particular, the performance of Costco’s warehouses. First of all, it refers to the actions of the government and its effects. Thus, in the United States, the authorities are loyal, and there is protectionism in the sector, a strong property protection system, and no special restrictions on trade (United States Securities and Exchange Commission, 2014). Moreover, Costco has the opportunity to grow due to political stability in major markets. Besides, in the U.S., there are complex environmental policies and established animal rights policies, which provide the company with the opportunity to improve its strategy and activities in this area. However, there are also risks and threats associated with political factors. There is an unstable political condition in the country due to the recent elections of the President. It may cause possible difficulties for Costco because the new government can change trade regulations, tariffs, and other business rules, thus negatively affecting the warehouse’s business.

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Economic Factors

Costco Wholesale Corporation, as well as any other company, should reconcile its business activities with the economic conditions (Chidrawar, Hatch, & Kramer, 2007). They include factors that impact the economic viability of the company. The economy of the United States is one of the most developed in the world. It has one of the highest and growing GDP rates in the world after China and the European Union (The CIA, n.d.). Thus, it is a great opportunity for Costco due to the high purchasing ability of its customers. Besides, there are low taxes in the country as well as the low inflation rate and developed foreign trade (The CIA, n.d.). It gives Costco the opportunity to grow and earn higher profits. Furthermore, the U.S. has one of the biggest labor forces in the world, more than 150 million people, which provides the necessary workforce for Costco. However, more than 15% of the population is below the poverty line, and 5% of the population is unemployed (The CIA, n.d.). It is a threat to the company as it indicates the inability of some people to buy Costco’s products.

Demographic Factors

When designing the strategy of development, especially the long-term one, many companies often take into account the demographic factors (Chidrawar, Hatch, & Kramer, 2007). The population of the United States of America is relatively big: more than 320 million people with almost a 1% annual growth rate, which is why the country is at the 4th place in the world (The CIA, n.d.). This advantage allows Costco Wholesale Corporation to have a bigger customer base. Besides, taking into account the age structure provided in Figure 1 and the young adult’s target market of Costco, it provides the company with a great opportunity to stimulate demand. Additionally, there is a constant flow of people from other countries, though the whites still comprise the biggest ethnic group and have the biggest purchasing ability compared to Latinos and other emigrants (The CIA, n.d.). However, the increased migration to the country also presents a threat of robbery and other crimes.

Sociocultural Factors

The sociocultural factors also influence the behavior of both customers and employees (Chidrawar, Hatch, & Kramer, 2007). There is an increased demand in the United States for the business social responsibility, which provides Costco with an opportunity to develop its corporate social responsibility programs as well as to improve the brand image and make the consumer perception more effective. Besides, there is also the animal rights trend that allows implementing new policies to increase customer satisfaction. The same is also with environmentalism. Additionally, the young or young adults, on whom Costco focuses, are now more interested in living in the city and do not usually drive (KnowThis.com, n.d.). As a result, the company’s target market is getting older creating the opportunity for Costco to develop and find new ways to attract more customers.

Technological Factors

Scientific and technical achievements significantly alter the environment of the company’s functioning. New technologies and new products appear, thus definitely influencing the competition. Scientific and technical developments change the lifestyle of the consumer and improve the quality of customer satisfaction (Chidrawar, Hatch, & Kramer, 2007). Various innovations appear in the areas of design, engineering models, distribution and sales, and marketing, thereby affecting the overall strategy of the organization.

Furthermore, there is a trend in the increase in e-commerce transactions. It creates the opportunity for Costco to attract greater numbers of customers through e-commerce. Besides, increasing business automation allows the company to implement new automation technologies, thereby increasing its business efficiency. Thus, Costco has begun to work with McKesson HBOC in order to be noticeable in the online pharmaceutical industry. Finally, the rapid pace of technological innovation provides the opportunity for Costco to introduce changes in various fields. Thus, Costco has implemented the virtual technology system in its business units with the purpose of expanding its IT-related functions (Microsoft TechNet, 2008).

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Environmental Factors

Today, an increasing number of companies are paying attention to the state of the environment. Therefore, the range of issues associated with its defense plays an important role in the strategic planning of many emerging industries and companies. For example, the climate is changing significantly and rapidly, thus presenting a threat to Costco Wholesale Corporation as the part of the products the company sells, such as groceries, depends on the appropriate climate conditions. Thus, climate change entails both threats and opportunities for the company. For instance, climate change has created the continuing colony collapse disorder that influences bees, which influences the supply of some of Costco’s products. Additionally, due to climate change, the lifestyles and perceptions of people change too. As a result, there is a trend of low-carbon lifestyles, which creates the opportunity for Costco to find new solutions to satisfy the needs of consumers. Taking into account the aforementioned factors, Costco should strengthen its supply chain with regard to the changing environment.

Legal Factors

Changes in the legislation directly affect many types of business activities as it imposes requirements on them. These factors include the laws and regulations of the government. Costco, as well as any other company, must operate according to the law. For example, it follows the legislation concerning its employees in terms of the minimum wage, working time, training, and other aspects (Bolt, 2004). Besides, the employment law may change providing the opportunity for Costco to improve the employment practices. Additionally, possible tax reforms may be both beneficial and detrimental to the company. Thus, Costco can optimize its performance or suffer from high tax rates. Moreover, the GMO regulations also allow the company to establish new policies requiring more precise GMO labeling. Consequently, Costco can use legal factors as opportunities to improve its business practices.

Global Factors

Costco Wholesale Corporation operates in 10 countries, including the USA, Puerto-Rico, Canada, Mexico, Great Britain, Japan, South Korea, Taiwan, Australia, and Spain, and has more than 700 warehouses around the world (Costco Wholesale Corporation, 2014). Therefore, global factors have a significant impact on its business activities. Thus, the unstable political environment in the host country can affect its operations. For example, the relationships and agreements between the countries may worsen, and the host country may ban American products as it happened with Russia. Furthermore, the changing economic conditions in the host country may appear to be unfavorable for the wholesale business. Additionally, bad demographic conditions in the host country may contribute to insufficient demand. Moreover, the consumer in the host country may have other perceptions and lifestyles compared to those of the consumers in the U.S. causing additional issues and demanding more effort. Besides, the lack of necessary technology may cause additional expenses because of a need to supply those machines and equipment from the USA. Furthermore, the increased care of the environment in the host country may require more innovative technologies to be used, thus resulting in additional costs as well. Finally, in Costco’s case, it is necessary not only to follow the U.S. law but also to adhere to the regulations in the host country and international law.

The Wholesale Club Industry

The wholesale club industry is analyzed with the help of Porter’s Five Forces that include the industry rivalry, bargaining power of suppliers, bargaining power of buyers, threats from substitute products, and the threat of entry.

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Rivalry among Established Competitions

There is a high degree of rivalry in the wholesale industry. It is caused by the fact that warehouses clubs sell such products as groceries, clothes, electronics, and other products that can be bought in many places, including supermarkets and department stores (Soni, 2016). Besides, there is a huge variety of companies that can present own unique competencies, such as convenience stores, metro stores, warehouse stores, and many others (Coriolis Research, 2004). In addition, there is a low switching cost in the industry, which means that the consumers can easily switch from Costco to its competitors.

On the other hand, in the wholesale club industry, the degree of rivalry is low; there are only three main players, including Costco. Thus, the major competitors of Costco are Sam’s Club and BJ’s that has also been operating on the market for a long time and offer similar products and services (Coriolis Research, 2004). Although the company is inferior to Sam’s Club in the number of sales points, Costco Wholesale is the largest in the world in its segment. Besides, Costco Wholesale is included in Fortune’s Global 500 list in contrast to its main competitors (Fortune.com, 2015).

Bargaining Power of Suppliers

There is low bargaining power of suppliers in the industry. It can be explained by the fact that there is a large population of suppliers, which means that a single supplier has no influence on such a company as Costco. Thus, the variety of suppliers that Costco uses prevents significant problems related to the inability of a single supplier to deliver products. Besides, Costco cooperates with the defined circle of suppliers and orders significant amounts of products, which enables Costco to set the prices. Additionally, not a single supplier of Costco accounts for more than 5% of the company’s revenue (Soni, 2016). Finally, the company uses vertical integration through Kirkland, Costco’s other brand, with the help of which it can withstand the increase in supplier prices being able to produce the product or take over the supplier.

The Bargaining Power of Buyers

There is a moderate level of bargaining power of buyers in the wholesale club industry. First of all, there is a low switching cost in the industry, so the buyers can switch competitors fast. Besides, the consumer needs and wants change frequently contributing to the switching. Additionally, the wholesales warehouses require large spaces, which means that it is complicated to work in the urban areas leaving a gap in meeting the requirements of urban consumers (Soni, 2016). On the other hand, Costco has a large number of customers, thus eliminating a possibility for one customer to have a strong impact on the company. In addition, Costco Wholesale focuses on the general public, so the members cannot bargain for lower prices.

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The Threat of Substitute Products or Services

There is a medium threat of substitute products in the industry, which can be explained by the fact that Costco offers a limited variety of products of only defined brands with only 1 or 2 alternatives. Customers looking for a wider variety of products are likely to switch to other stores. Additionally, the substitutes for Costco’s product can be easily accessed without additional costs. Besides, there is a great variety of those substitutes; in particular, there are many substitutes for food products that are widely presented at Costco’s warehouses and that can easily satisfy the expectations of consumers. On the other hand, the wholesale trade is able to offer convenient low prices that are difficult to substitute.

The Threat of the Entry of New Competitors

There is a low threat of entry of new competitors in the wholesale club industry due to the entry barriers. First of all, it requires a high capital investment to enter this business. Additionally, the existing wholesale club companies in the industry have loyal consumers and suppliers as well as the necessary resources, which would be difficult for the newcomers to obtain. Besides, Costco and its competitors have been in the industry for decades; therefore, it will be difficult to achieve similar popularity. Moreover, governmental regulations are another obstacle that the new entrants would have to overcome in order to enter the industry. Besides, there are complex distribution channels in the industry that the existing players have already established. Finally, such a giant as Costco is a formidable opponent.

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